An Easy Signal Using Minimum Prices

This is an extremely simple short signal I came across while prospecting for new indicators to add to my EUR/USD trading system. Here's how it works:

Timeframe: Daily (24 hours)

Signal: If the previous trading day's minimum price is greater than or equal to the closing price the trading day before that, a short signal is generated for the next trading day.

These conditions occur disproportionately often during US weekends, with price gaps occurring between Friday's closing price and the minimum price in Sunday trading. So let's say it's the end of trading in the Sunday session. Sunday's minimum EUR/USD price never fell below Friday's closing price. Therefore, this signal indicates you should go short the EUR/USD on Monday.

I tested this little signal out on over 4 years of daily price data going back to September 2002, and in that time it would've generated 37 short trades (selling the EUR/USD pair) and 506 pips in profit after subtracting a 3 pip spread. Of those 37 trades, 23 would've ended positively, for 62% accuracy. Here's a chart of its performance:

So it's not the commonest signal, occurring less than once a month, and it doesn't yield gigantic profits. But on the other hand, it's extremely simple and has a fairly consistent track record, so it might be worth adding to your trading system.

So why does it work? (Keeping in mind that past performance doesn't guarantee anything, anytime, anywhere.) My theory is that it's a type of overbought signal - basically you're spotting a point when the market spikes upward without dipping back even slightly, and in those conditions a correction back downward becomes more likely the next day. This is especially true after the weekend break, when traders return to the markets anticipating a correction or reaction to the previous week's activity.

If nothing else I hope this gives you some ideas for creating your own signals using minimum price data. Stay tuned for a similar long signal using maximum prices...

Related topics:
Signals Using Maximum/Minimum Prices
Simplest. Signals. Ever.